Product Line Liability Just Doesn't Fly.

• Author: Campbell, Daniel R.

A recent series of cases in the aerospace product liability space attempted to breathe new life into the product line exception to the general rule that a successor corporation is not liable for the wrongdoing of the predecessor. While all four of the most recent cases rejected the product line theory on summary judgment, the renewed invocation of the product line doctrine warrants a revisiting of it to understand why this once bourgeoning, economically-based exception to successor nonliability no longer flies in the vast majority of states.

This article will discuss the rule of successor nonliability generally, and the commonly known exceptions to that rule. Then, the two "modern" exceptions--continuity of enterprise and product line--will be reviewed, with an in-depth analysis of the product line theory and its origins. Finally, this article will address the most recent rejection of this doctrine by the Seventh Circuit and Illinois state courts in the four recent cases involving alleged product defects in airplanes.

1. Successor Liability and Its Traditional Exceptions

   As a general rule of successor liability, when a manufacturing business acquires the assets of a predecessor manufacturer, the successor is not liable for the unassumed liabilities of the predecessor whose assets it purchased. (1) As with every rule, there are exceptions. For example, the successor may be liable for the predecessor's liabilities when, in the words of the Restatement Third of Torts, "the acquisition [of the business]: (a) is accompanied by an agreement for the successor to assume such liability; or (b) results from a fraudulent conveyance to escape liability for the debts or liabilities of the predecessor; or (c) constitutes a consolidation or merger with the predecessor; or (d) results in the successor becoming a continuation of the predecessor." (2) The majority of courts impose strict liability on successor corporations only if one of the four above-listed exceptions apply. (3)

2. The Modern Exceptions of Continuity of Enterprise and Product Line

   Over time, a small number of states have recognized two additional exceptions to the general rule of no successor liability for an asset-purchaser. Those exceptions are referred to as the continuity of enterprise, and the product line exception.

   Continuity of enterprise is considered an expansion of the traditional, "mere continuation" exception to the general rule of successor non-liability as it has less rigid requirements. (4) This exception is still a minority rule, followed by only a few jurisdictions in certain limited circumstances. (5) Under the mere continuation exception, "a successor may be subject to liability for the debts of its predecessor where it is found that the successor is essentially a reincarnation that is merely a 'new hat' for the predecessor entity." (6) For the mere continuation exception to apply, there must be "a continuity of ownership and control" between the successor and predecessor businesses. (7)

   Under the continuity of enterprise theory, however, "liability may also be imposed on a successor that has continued the business operations of the predecessor." (8) This "represents a shift of focus from the mere continuation exception, which looks to continuation of the business entity of the predecessor." (9) The continuity of enterprise approach focuses less on whether the legal owners of the predecessor continue to influence control over the successor company and instead "is focused on whether the successor has continued the same general business operations of the predecessor entity." (10) Accordingly, the continuity of enterprise exception "applies without regard to whether there has been a continuity of ownership by the shareholders of the predecessor." (11)

   The product line exception was first recognized by the California Supreme Court in Ray v. Alad Corporation. (12) The court in Ray held that "a party which acquires a manufacturing business and continues the output of its line of products... assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired." (13) The idea behind the product line exception is that a manufacturing business that buys the manufacturing assets from another business that then dissolves may assume strict liability for defective products produced by the predecessor company.

   An example of the exception in action might be helpful. Imagine a business that manufactures a line of aircraft of a specific model. Within that product line, i.e., all airplanes that are this model/type, there are hundreds of individual aircraft with different characteristics and serial numbers. This manufacturer produces a defective unit (a defective airplane). Another manufacturer then purchases substantially all of the assets necessary to continue manufacturing the product line (the assets necessary to produce these aircraft). The product line theory says that the successor company acquires liability for injuries caused by any defective product (individual aircraft) produced by the predecessor manufacturer even though the successor company did not manufacture or sell the product or place it into the market. Like the continuity of enterprise exception, it is still a minority rule, followed by only a few jurisdictions. (14)

   Despite the limited adoption, the product line exception has long been a "public policy" argument for plaintiffs in jurisdictions that reject the exception, and it recently appeared in four cases in Illinois, which will be examined later in this article. In order to understand the policy rationale of the product line exception, we will provide a close review of Ray to show the policies and particular circumstances that led to the minority rule.

3. The Extension of Liability Based on Public Policy Grounds

   The plaintiff in Ray brought a strict liability suit against the defendant, Alad Corporation, for damages resulting from a defective ladder. (15) The defendant--referred to throughout the case as "Alad II"--neither manufactured nor sold the defective ladder, "but prior to plaintiff's injury succeeded to the business of the ladder's manufacturer, the now dissolved 'Alad Corporation' (Alad I)." (16) Alad II purchased Alad I's "plant, equipment, inventory, trade name, and goodwill" and "continued to manufacture the same line of ladders under the 'Alad' name, using the same equipment, designs, and personnel." (17) Further, "[a]s part of the sale transaction, Alad I agreed 'to dissolve its corporate existence as soon as practical.'" (18)

   The California Supreme Court examined whether Alad II could be held strictly liable for the defective product in its role as successor to the manufacturer. The court began by considering "the rule ordinarily applied to the determination of whether a corporation purchasing the principal assets of another corporation assumes the other's liabilities." (19) Following the general rule set forth in the Restatement Third of Torts, (20) the California Supreme Court held that the rule allowed for liability only if:

   there is an express or implied agreement or assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller's debts. (21) Despite recognizing that "[n]one of the rule's four stated grounds for imposing liability on the purchasing corporation is present," the court nonetheless considered "whether a special departure from that rule is called for by the policies underlying strict tort liability for defective products." (22)

   Ray explained that the purpose of strict tort liability for defective products "is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves." (23) The court then held that "a party which acquires a manufacturing business and continues the output of its line of products under the circumstances [presented in this case] assumes strict liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired." (24) The "product line exception" to successor liability was thus born.

   The Ray court...